Don’t be fooled by January pay — higher taxes still loom without fiscal cliff deal

WASHINGTON
-- Workers probably won't feel the full brunt of next year's tax
increases in their January paychecks, but don't be fooled by the
temporary reprieve.

No matter what Congress
does to address the year-end fiscal cliff, it's already too late for
employers to accurately withhold income taxes from January paychecks,
unless all the current tax rates remain unchanged, which is an unlikely
scenario.

Social Security payroll taxes are
set to increase on Jan. 1, so workers should immediately feel the
squeeze of a 2 percent cut in their take-home pay. But as talks drag on
over how to address other year-end tax increases, the Internal Revenue
Service has delayed releasing income tax withholding tables for 2013.

As
a result, employers are planning to withhold income taxes at the 2012
rates, at least for the first one or two paychecks of the year, said
Michael O'Toole of the American Payroll Association.

If
employers don't withhold enough taxes in January, they will have to
withhold even more taxes later in the year to make up the difference.
Otherwise, taxpayers could get hit with big tax bills, and possibly
penalties, when they file their 2013 returns.

The
tax increases could be steep. If Congress fails to act, workers at
every income level face significant tax increases next year as part of
the year-end "fiscal cliff."

A taxpayer making
between $50,000 and $75,000 would get an average tax increase of
$2,400, according to the Tax Policy Center, a Washington research group.
If the worker is paid every two weeks, that's about $92 a paycheck, on
average.

Someone making between $75,000 and
$100,000 would get a tax increase averaging nearly $3,700. If the worker
is paid every two weeks, that's about $142 a paycheck.

O'Toole
said it would take most employers two weeks to four weeks to update
their payroll systems, once new tax withholding tables are released. For
some small businesses, it could take longer.

"Employers
can't really just come up with withholding tables on their own,
depending on what the rates are," O'Toole said. "The smaller companies
that do not use a payroll processing service probably would have more
problems than anyone else."

On Friday, the IRS
said it plans to issue guidance by the end the year, though it won't be
early enough to affect paychecks in early January.

"We
are aware that employers have questions with respect to 2013
withholding," the agency said in a written statement. "Since Congress is
still considering changes to the tax law, we continue to closely
monitor the situation. We intend to issue guidance by the end of the
year on appropriate withholding for 2013."

About
three-quarters of taxpayers got tax refunds this year, averaging
$2,707, according to the IRS. That gives most taxpayers some leeway to
manage their income tax withholding. However, many people rely on tax
refunds to pay bills or make major purchases.

"The
reality is, the vast majority of Americans do live paycheck to paycheck
and that tax refund is their most significant payday of the year," said
Bob Meighan, vice president of TurboTax, an online tax preparation
service.

Most of the expiring tax breaks were
first enacted under President George W. Bush and extended under
President Barack Obama. Obama campaigned for re-election on extending
the tax cuts on incomes below $200,000 for individuals and $250,000 for
married couples. Obama would let the tax cuts expire on incomes above
those amounts.

In negotiations with House
Speaker John Boehner, Obama offered to raise the income threshold,
limiting tax increases to those making more than $400,000. Boehner, who
has argued for years that the tax cuts should be made permanent for
everyone, responded by trying to push a bill through the House that
would have let many of the tax cuts expire on incomes above $1 million.

Many
Republicans revolted and Boehner, R-Ohio, shelved the bill, sending
lawmakers home for the Christmas holiday and leaving the outcome of
talks in doubt as the new year approaches.

If
Congress and the White House cannot reach a deal, income tax rates would
go up, estate taxes and investment taxes would increase and the
alternative minimum tax would hit millions of middle-income people. A
temporary payroll tax cut that has benefited nearly every wage earner in
2011 and 2012 expires, costing the average family an additional $1,000 a
year by itself.

In addition, dozens of other
tax breaks for businesses and individuals that are routinely renewed
each year already expired at the end of 2011. Congress was expected to
renew many of them by January, so taxpayers could still claim them on
their 2012 tax returns.

If Congress doesn't
act on those tax cuts, businesses would lose a popular tax credit for
research and development as well as generous tax breaks for investing in
new plants and equipment. Individuals would lose federal tax breaks for
paying local sales taxes, buying energy efficient appliances and using
mass transit.

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